The central bank and the US Department of the Treasury on Friday issued a joint statement that both sides agreed to avoid currency manipulation and the use of exchange rates to gain a competitive advantage, and would only intervene in foreign-exchange markets to combat excess volatility and disorderly movements. The central bank also agreed to disclose its foreign-exchange intervention amounts quarterly rather than every six months, starting from next month. It emphasized that the joint statement is unrelated to tariff negotiations between Taipei and Washington, and that the US never requested the appreciation of the New Taiwan dollar during the consultations.
The release comes as the US Treasury is expected to issue its semi-annual Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the US in the coming weeks. Although the June report did not identify any of the US’ major trading partners as currency manipulators, it nevertheless kept Taiwan, along with China, Germany, Malaysia, Singapore, South Korea and Switzerland, on its currency manipulation watch list. If the US Treasury names Taiwan a currency manipulator in the forthcoming report, it could create a serious issue amid sensitive tariff talks. Already, Taiwan’s widening trade surplus with the US, driven by strong exports amid an artificial intelligence boom, is complicating those negotiations.
Coincidentally, Thursday’s issue of The Economist warned about Taiwan’s economy in its cover story, titled “The Hidden Risks of Taiwan’s Boom.” The article claimed that Taiwan looks strong and prosperous on the surface, but suffers from the “Formosa flu,” a long-standing structural issue that has been overlooked for years: The central bank’s deliberate undervaluation of the NT dollar has impaired Taiwanese’s purchasing power, pushed up housing prices and created growing financial risks.
The central bank in response said that many factors affect exchange-rate movements, and market dynamics of supply and demand determine the NT dollar’s valuation. It also rejected the British magazine’s use of its Big Mac Index to assess the value of the NT dollar, saying the price of a single product cannot adequately measure the overall valuation of a currency.
The World Bank and the IMF use purchasing power parity (PPP) to calculate exchange rates that equalize the purchasing power of different currencies, or to measure and compare GDP among countries. PPP is calculated based on a basket of goods and services, and it has no causal relationship with exchange rates. The reason is simple: Exchange rates are determined by the foreign exchange market, whereas PPP is determined by the consumer market. In that sense, PPP is already not a sufficient indicator for determining the equilibrium exchange rate, much less when using a single-product index like the Big Mac.
Similar arguments have been raised in the past, and The Economist’s assertion that the NT dollar is undervalued, leading to economic imbalances and problems such as unaffordable housing and stagnant wages, is nothing new. The problem is that macroeconomics is never a simple matter of right and wrong, and there are almost no perfect solutions for economic issues. Instead, most choices involve compromise, opting for decisions where the benefits outweigh the drawbacks and the harm is minimal.
Taiwan’s achievements are real, but the rising pressure on household living standards is no place to hide and, indeed, most people do not feel the benefits of economic growth. Who should pay for Taiwan’s economic boom? There is no exact answer, but policymakers need to rethink the nation’s economic playbook and deal with this long-overdue exchange-rate issue.
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